Carbon tax and the Indian economy

India is moving from a developing to a developed country at a rather good pace and an important agenda in developed countries is optimization of clean energy resources. Obviously, realising this vision needs the implementation of building codes, bio-fuel standards and vehicle-efficiency standards, public funding research and development etc. These initiatives need heavy funding and an option to source such funding is by way of implementation of a carbon tax. But India doesn’t have an explicit carbon tax, but it does have a coal cess. (More on the coal cess below.)

How is a carbon tax different from a coal cess? Well for starters, a coal cess penalises carbon emitted from coal and not from any other fossil fuels like oil or natural gas. (Remember, crude oil and natural gas are not under GST purview either). But a tax only on coal will not encourage switching from fossil fuels to other cleaner sources of energy. A carbon tax on the other hand, will have the potential to generate decent revenue from use of fossil fuels i.e. till taxpayers switch to cleaner sources. The range of usage of such revenues is equally large. This revenue can be used to develop renewable sources of energy and widen the country’s economic capacity by distribution of the funds to States. Speaking of which; In the 41st Goods and Services Tax Council meeting held on 27th August 2020, the council met to discuss options to help States with their shortfall in revenue from GST collections. This year has been particularly difficult for the Centre to meet its promise of compensating States with a 14% increase in funds on top of the regular revenue collection. But the shortfall in compensation has been a teething issue even before the pandemic and subsequent nationwide lock down. 

While the States have already been presented with two options for overcoming the shortfall in GST revenue, there have been suggestions from experts to use existing cess funds instead of borrowing from the Reserve Bank of India. One such option is the use of funds collected under the Coal Cess. 

In the year 2010, an extra levy of ₹50 per tonne was imposed on coal. This was later raised to ₹200 per tonne in 2015 and subsequently raised to ₹400 per tonne in 2016. Obviously, when the Goods and Services Tax was implemented in 2017, the carbon tax was subsumed under GST. However, from 2010 to 2017, revenue from the carbon tax amounted to a whopping ₹56,000 crores. Once GST was implemented, this amount was transferred to the GST compensation fund. While these funds were expected to be utilised to promote clean energy and promote clean environment research and development, the money has simply been sitting under the GST compensation fund and could help States and the overall economy.